New America nudges for saving

The New America Foundation hosted a conference this week, “The Automatic Revolution,” on financial literacy and stability. One idea floated was a product aimed at lower and middle income households to help turn tax refunds into springboards for saving. The New America’s Financial Services and Education Program is developing what it calls an Assets and Transactions Account or ATA.

Each year, tax refunds would be electronically deposited into individual ATAs for tax filers who do not direct deposit their refund into another account or who do not opt out of the ATA. The refund would be bifurcated between a transaction and a savings account, with five percent automatically deposited into an interest bearing savings account.

The ATA, which would be issued, delivered, and serviced by financial institutions on behalf of the U.S. Department of Treasury, would be accessible with a network branded card and could be used for point of sale transactions, to access cash, to make web-based or telephone bill payments and retail purchases, and possibly to make remittances and secure money orders. The savings component would help to meet short-term expenses and savings goals. And with enactment of federal legislation, the ATA could serve as the “plumbing” for large-scale asset policy targeted at lower income families.

The Manpower Demonstration Research Corporation and Rockefeller Foundation are working together on a pilot program called AutoSave that, like Save More Tomorrow, tries to create a default unrestricted non-retiremment savings account to help workers build assets.

Under this plan, employers that make payroll deductions will be required to make deposits to the AutoSave system on behalf of their employees and the self-employed would be able to make deposits into the system at their discretion. Employers will shoulder no extra costs but will facilitate automatic deposits. AutoSave will offer a limited set of low-cost investment options, such as index funds, which would be administered by professional money managers. Money deposited in this system belongs to the individuals and since deposits will be from after-tax dollars, normal tax rules apply. Individuals will have the flexibility to opt-out of the system or drawn down on their funds at any time.

Inspired by Nudge’s fifth rule of choice architecture – Expect Error – the foundation is exploring an idea it calls “just in time” education, which starts with the philosophy that people will probably make mistakes at some point and they would appreciate a little help.

One example of “just in time” financial education is the whole system of text messaging alerts so that a consumer who is in danger of, for example, overdrafting an account or going over a credit limit, knows that’s going to happen before making the “error,” thus enhancing the likelihood of avoiding the mistake.

Chase Bank offers a similar “just in time” system that sends text message alerts when certain balance levels that customers choose themselves are hit.